In November the Productivity Commission released a report titled Economic Structure and Performance of the Australian Retail Industry. The inquiry recommends a number of significant changes to Government policy. Two key recommendations have implications for the property industry:

1. To relax planning regulations to allow more retail development;
2. Fully deregulate retail trading hours.

These are potentially important regulatory changes for owners of Australian shopping centres. It has been argued the restrictive planning has been an important contributor to the strong performance of regional shopping centres over the long term. Over the past 20 years specialty retail rents have grown at approximately 0.5% p.a. ahead of inflation. This rise in real rents has been linked to the limited availability of retail space arising from restrictive planning regimes.

As always, when the rules of the game change there are both winners and losers. Some centre owners will benefit from the changes while others will not. Similarly, the impact on retailers themselves may be complex.

An increase in supply may be a double edged sword for retailers. On one hand they may benefit from lower rental costs, but on the other they will likely face increased competition both from expanding domestic retailers and the arrival of new international retailers. One of the main hurdles for international retailers seeking to expand in Australia is the high cost and limited availability of suitable sites.

Western Australia is the State that currently has the most restrictive regulations in terms of planning and trading hours. Most retail centres are not permitted to trade on Sundays unless they fall within ‘special trading zones’, of which there are only five across metropolitan Perth. These specified zones exclude some of Perth’s largest regional shopping centres (‘Regional’ is the largest retail format in Australia, not a geographical category). Western Australia also has net lettable area limits in place. It is currently 80,000 sqm in the case of regional centres. So, it seems Western Australia would be the State most affected by the proposed regulatory changes.

The Productivity Commission, it seems, intends to attack high occupancy cost ratios for tenants from both sides of the equation. The aim of increasing supply/competition is likely an attempt to reduce rental growth pressure, and by deregulating trading hours they also attempt to simultaneously increase retail turnover. If adopted, the recommendations will almost certainly widen the performance gap between the strong and weak retail centres, a trend which has become increasingly evident during 2011 as a result of weak consumer spending.

Either way, if these changes are adopted we could expect a healthy increase in retail construction activity.

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